Help for stressed-out global supply chains

Posted by: Steve Hamm on December 31

The software-as-a-service business model is such a good idea that it amazes me that it’s taking so long for it to penetrate Corporate America beyond the initial foray in sales force automation. I attribute this to the don’t-change-a-thing ethic that took over the IT strategies of many companies in the wake of the dot-com boom and bust. Behind the scenes, though, additional SAAS applications are being rolled out and are being adopted by big companies.

One example I came on recently was Aravo Solutions, an 8-year-old San Francisco company that has only 60 employees but seems to have a very useful piece of software. Aravo’s application allows companies to manage their far-flung supplier networks. The company just raised $7 million from a group of patient investors who have been backing it since its beginnings in 2000. Its seems like their patience may be paying off. This software seems to be just what manufacturers need at a time when their supplier networks are under incredible stress. Figuring out which suppliers are weak links and responding quickly could be crucial for them over the coming months.

When Aravo announced its latest round of funding a couple of weeks ago, it also announced a customer win that should help it win credibility with the upper crust of corporations: GE. The manufacturing and finance giant has just completed rolling out the largest SaaS deployment by anybody anywhere. It's managing its network of 500,000 suppliers. ""SaaS has matured," says Tomas Hattier, who manages global purchasing and vendor management for GE. "Earlier, there were issues around security and robustness and the depth of the knowledge of the companies that are providing it. Now the technology and the companies have matured to the point whree this is a viable alternative for companies."

The online system allows GE and its suppliers to interact in ways that weren't possible before. They can easily share data about orders, inventories, and availability--and be assured that it's accurate and up-to-date. It requires much less manual gathering of information by GE employees and eliminates the need for third-party data suppliers.

Aravo has an interesting financial provenance that might be instructive for entrepreneurs struggling to raise money now. Founder and CEO Tim Albinson worked at Goldman Sachs after he got his MBA in 1999, and dreamed of applying Internet technology to financial markets. His initial backing came from wealthy people he had met through GS. He didn't need to get money from traditional venture capitalists. He started with the goal of building a barter trade exchange online, but shifted six months later to supplier management--switching on the the service in 2003. Most of Albinson's investors have stuck with him through the company's long incubation and gradual ramp up. That's something that traditional VCs might not have been willing to do. They include Big Sky Partners, which is Charles Schwab's family investment vehicle, Stephen Friedman, a former chairman at GS, and Tony Mayer, a former CEO of JP Morgan Capital. Even through the investors own more than 50% of the company, they give Albinson a tremendous amount of independence. "If you can finance your company with angel investors, it's a hard thing to do, but at the end of the day it can be really good for your company," he says.

Where will Aravo go from here? To me, its success seems to be a matter of when, not if. Albinson won't reveal much about his finances, but says annual revenues are between $10 million and $20 million, and he expects to be profitable in 2010. That crossover could have come earlier, but he chose instead to respond to rising demand by hiring more engineering and service employees. The company has just 25 customers, but in addition to GE they include other Blue Chip outfits including IBM, Accenture, and the Dept. of Defense. I can envision a hockey stick revenue move at some point--though revenues at SaaS companies tend to grow more steadily and be more sustainable because of the annuity payment business model. If things go right for Aravo, it could be headed for an IPO in a few years.

For Aravo's backers, the payoff will have been a long time coming. But, at least, there's real value and real potential behind this investment. Which can't be said for a lot of others.

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